Diversify and prosper

Maximising benefits, simplifying tax

The South African economy represents less than 1% of the global economy, and prospects for meaningful GDP growth in the next two years are slim. For local investors, this means that the South African economy is unlikely to provide decent returns. Consequently, high net worth investors are looking to offshore investments as a means to mitigate the risk of domestic over-concentration and increase the potential for greater and diversified returns, according to Wayne Sorour, head of Old Mutual International – Sales & Distribution.

“In most instances, we will be working with a financial advisor who will have done a needs analysis for the client and determined their requirements. With discretionary money in that space, the offshore discussion comes in a lot. Once it has been determined that the need or requirement is offshore, that’s where we come in,” says Sorour. “Now that one is able to invest R10-million per year per person, so between a couple you can do R20-million per year, it’s more about finding the best opportunities to invest,” says Sorour.

One of the key benefits of offshore investment is that it enables investors to be proactive while mitigating risk.

“Diversification is key,” emphasises Sorour. “The JSE offers a cap of some 1.2-trillion US dollars, whereas investing globally it’s 80-trillion dollars. Further, not one of the global stocks that you invest in will be more than 1% of that concentration, whereas in South Africa, the JSE is dominated by a couple of companies, such as Naspers. That’s quite a big concentration risk on one stock within one economy,” Sorour explains.

Sorour points out that in 2018, the JSE was down 21.3%,in US dollar terms, as opposed to 4.38% and 3.5% for the S&P500 and Dow Jones respectively. In rand terms, the JSE was down 8.5%, the S&P500 was up 11.1% and the Dow Jones was up 12.2%.

In this light, it’s no surprise that more advisors are focusing on offshore than ever before. “Some advisors will argue that if you invest for a client into a normal balanced fund, you should get between 20 and 30% offshore exposure in any case, but there definitely is an increase in the amount of advisors focusing on offshore and encouraging clients to get the exposure that’s required,” says Sorour.

“If you’re looking at returns only, an asset swap fund or feeder fund is easy to access and administer. For example, if you’re investing into a global, rand-denominated equity fund, but you’re getting full offshore exposure to the same amount of stock that you would be getting on the direct dollar-denominated one, the result is the same. However, the money must come back to South Africa. High net worth individuals and South Africans generally want to have dollars, pounds and euros available offshore. That’s where the direct game becomes more applicable. You can bring the money back to South Africa whenever you want, effectively creating your own asset swap.”

Tax planning is of the utmost importance. “Why throw the money offshore into any type of vehicle or mechanism only to have your returns eroded by tax or estate tax or estate duty?” asks Sorour.

However, working out returns can be tricky and onerous. This is where Old Mutual International's wrapper comes in.

“We calculate, deduct and pay over the tax on behalf of clients to SARS,” says Sorour. “It takes away the responsibility and the burden of clients having to do it themselves. The tax rates are also generally beneficial.”

From an estate duty perspective, offshore money forms part of an estate for estate duty purposes in South Africa. Over and above that, assets in the US and UK can be subject to situs tax, where certain assets are deemed to be estate dutiable in those jurisdictions, where the estate duty percentage on the top end is 40%, whereas in South Africa it’s generally 20%.

Fortunately, the OMI wrapper product eliminates liability for UK and US Estate Duty (Situs Tax) and simplifies estate administration: “Under a beneficiary nomination, you nominate beneficiaries who will inherit the investment at your death so that the investment can continue in their name,” concludes Sorour.